Starlite Furniture Corporation, a manufacturer of office furniture, began the year with 4,500 units in inventory. The company estimated the budgeted sales for the four quarters of the current year to be: Q1: 15,000 units; Q2: 20,000 units; Q3: 30,000 units; and Q4: 25,000 units. Management believes that an ending inventory equal to 30% of the subsequent quarter’s sales is appropriate. What are the production needs for the first quarter?

Question

BlackTom AI · Accepted Answer

To tackle the production needs for the first quarter, start by identifying the key figures: the budgeted sales for Q1, the desired ending inventory for Q1, and the beginning inventory at the start of Q1.
The company begins the year with 4,500 units in beginning inventory. Management wants the ending inventory for Q1 to be 30% of the next quarter’s sales, which is 30% of Q2 sales (20,000 units). 0.30 × 20,000 = 6,000 units.
The production needed during Q1 must cover the Q1 sales and replenish the ending inventory, while accounting for the starting inventory. The standard production formula is:
Production = Q1 Sales + Ending Inventory (Q1) − Beginning Inventory (Q1).
Plugging in the numbers gives: Production = 15,000 + 6,000 − 4,500 = 16,500 units.
Now, evaluate the answer choices:

Option A: 15,000 units
This would cover only the Q1 sales if there were no change in inventory, but it ignores the need to build the ending inventory to 6,000 units and does not compensate for the starting 4,500 units. Therefore, it underestimates production.

Option B: 18,000 units
This overstates the required production by 1,500 units relative to the correct calculation. The extra amount does not align with the inventory targets or the sales forecast when applying the standard formula.

Option C: 22,500 units
This significantly overestimates production by 6,000 units compared to the calculation. The discrepancy suggests double-counting inventory or misapplying the ending inventory target.

Option D: 16,500 units
This aligns precisely with the production formula outcome: it equals Q1 Sales (15,000) plus Ending Inventory (6,000) minus Beginning Inventory (4,500), yielding 16,500, which satisfies both the sales demand and the inventory plan.

In summary, Option D matches the standard budgeting approach for production planning: cover expected sales while adjusting for the change in inventory levels based on the specified ending inventory target. The other options either ignore the inventory adjustments or misapply the target ending inventory concept.

SU25_ACT_513_2601 WK 9 Pre-Class Check: Budget Like a Boss!

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Similar Questions

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For a production budget, the _________ is the beginning inventory for the year.

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